The first essay analyzes the effect of taxpayers' ethnic identity and the country's ethnic heterogeneity on voluntary tax compliance. I use data from the European and World Values Surveys Wave 4. Individual voluntary tax compliance is measured based on self-reported attitude towards tax cheating. Survey respondents are categorized into ethnic majority and minority groups of their country based on their racial, linguistic and religious background. Using a pooled cross-country micro-level specification, I find that individuals from the minority groups are more likely to report that tax cheating is justifiable than those from the majority groups. In addition, ethnic heterogeneity of the country's population dampens the tax morale of the majority groups. I also find that on average, the voluntary compliance level is lower in heterogeneous countries than homogeneous countries.; The second essay presents a laboratory experiment to study the tradeoff between self-interest and group loyalty. Specifically, we measure the effects of induced group identity on participant social preferences. We find that when participants are matched with an ingroup member (as opposed to an outgroup member) they show more charity concerns if they have a higher payoff and less envy if they have a lower payoff. While participants are more likely to reward an ingroup match for good behavior they are less likely to punish an ingroup match for misbehavior. They are significantly more social-welfare concerned when matched with an ingroup member. The findings indicate that participants are more altruistic towards an ingroup match. Moreover, ingroup matching generates significantly higher expected earnings.; The third essay analyzes the response of state spending to windfalls using tobacco settlements in the U.S. in the late 1990s as a natural experiment. We find that state direct spending increases by about {dollar}1 in response to one dollar increase in the settlement funds and by about 8 cents to the voter private income, which is strong evidence in support of the flypaper effect in the public finance literature. We also find states that have securitized partially or entirely their settlement revenue have larger spending responses.
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